Playing Defense in a Tough Market

At times, markets have nice price trends where being long or short for days or weeks will lead to profitability. These are the markets that most new traders make money in by having a bias and holding onto that belief. This usually doesn’t end well because they are unable to understand when the trend is changing. Other markets trade within ranges. These traders buy support and sell resistance over and over. These are the markets that will make them the most money.

 

Then there are times of high volatility and no trend, no support, and chaotic price action. These fake breakouts and momentum that unexpectedly fades and reverses will quickly take profits. It’s time to step back, trade smaller, trade less, and wait for a pattern to emerge from the chaos when the market rewards taking quick profits and punishes your signals. It’s best for most traders to do nothing during corrections and downtrends and wait for an uptrend or bull market to come back.

 

In the current market defense is more important than offense. Keeping your capital safe is more important than trying to grow it.

 

This is the time to focus on:

1.When prices are below the 200-day moving average.

2.Your total risk exposure.

3The VIX levels.

4.The Average True Range.

5.Your position sizing.


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Posted By kimberlyjones : 29 August, 2020
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#1 Hello ! all.I found yesterday some thing intresthing and today with this system i did make couple profitable trades.I don't know or this system was published befor,but i think we can test this system all together.Manual i don't have.You just intall all indicators to indicators folder and drop all to any currency chart and you can see then very usefull tool for trading...    

There is no best moving average crossover strategy for swing trading regardless of what anybody tells you.   All we can do as swing traders is put the odds in our favor by using a few technical indicators as well as price action.  We need an edge and even a small edge can build your trading account if you trade it consistently.   This swing trading strategy will use a few technical analysis tools that are designed to show us if we are in an environment that supports a trade.   We are going to use 2 moving averages to determine the direction of the trend.  For this strategy, we are going to use the 5 SMA and 10 SMA (simple moving average) The stochastic indicator will be used with the settings 14,3,3 and the levels 80 and 20.  We will use these levels to indicator an oversold/overbought market condition The RSI (relative strength index) will be set to 14 and we will use the 50 level to help confirm a strong trending environment.   Consult your trading platform user manual to show you how to apply these technical indicators onto your chart.   What A Moving Average Crossover Means   There is nothing magical about any moving average crossover.  Even the so called “golden cross” doesn’t pan out in extensive testing as having any deep meaning.  Moving averages, like all technical analysis indicators, are derivatives of price.   Moving averages simply calculate the average of X number of price points in the past.  Obviously when a trend is slowing down the price range decreases and you start getting closing prices closer to the one previous.   What may appear to be a moving average supporting price is simply an artifact of slowing price action which allows the average to catch up to price.   When we use it for trend direction in the crossover, all we are seeing the average of the previous 5 closes and the average of the previous 10 closes are getting smaller.  You eventually see the crossover occur.   We will use the cross as the first indicator for a sell signal or a buy signal.     This is the daily chart of the EURUSD.  Since we are looking at swing trading strategies, I much prefer longer term time frames for trading so swings can actually develop that have the potential to run.  Choose the time period you want to trade and be consistent.   If you are trading a daily chart, avoid the temptation to zoom in or out to a different time period to convince yourself of a trade.  You also want to monitor any current positions on the time period you entered the trade on.   A few key points:   The 5 and 10 SMA are a fast and slow moving average which we will use for the first signal in our trade setup.  They will help us define the new trend direction. The stochastic will be used for oversold and overbought. We won’t ignore the cross of the lines if they take place around the 50 level. We only care about this indicator if the moving averages have crossed. The RSI will be one more tool to see if price is either breaking down for shorts or is gaining strength for a buy signal.  This is the last variable in a buy or sell signal.   We will not ignore price action or support and resistance.  Nothing pays but price and you will see an example where price structure would have had you sitting on your hands (although the setup never does confirm).   What Is A Sell Signal?   These numbers do not represent what we see on the above chart.  That will be discussed after you learn the setups.   Wait until 5 sma crosses 10 sma to the downside Wait for the candlestick that forced the crossover to close. Look down and see if the Stochastic indicator either above the 80 level or has started to head down below the 80 level. Check to see if the RSI indicator is breaking through the 50 level If both 3 and 4 are true, then place a sell stop order 3-5 pips below the low of the candlestick Your stop loss can be above the high of the last candlestick or a 2 bar high.   What About Profit Taking?   You can trail your stop loss above each lower high to really get some home run trades.  You could also exit on the next crossover or if there is signs of exhaustion coming into the market.   I will say it again…whatever you choose to do, be consistent in your approach.  This is where using a trading plan and logging all your trades will be important.  You can’t fix what you don’t track.   What Is A Buy Signal?   Your signal to buy is the exact opposite as a sell signal.   Upside cross of 5 and 10 SMA Wait for close candlestick Stochastic is below the 20 level and rising ( or recently crossed) RSI is breaking 50 level If 3 and 4 are true, place a buy stop order 3-5 pips above the high Your stop loss can be below low of previous candlestick or 2 bar low.   Swing Trading Example Of Crossover Strategy   You can open the chart above in a new window so you can follow along.   Everything sets up nice for this sell signal.  The crossover occurs to the downside.  The stochastic has recently turned to the downside and RSI has broken 50.  We don’t get a lot of price movement here but we also have just come from a period of price movement that made up an ascending triangle. You could exit the previous trade here.  This is a beautiful buy signal as the crossover occurs, Stochastic is rising and RSI has just broken 50 No sell signal so no trade exit.  RSI doesn’t touch 50, Stochastic crosses back up around the 50 level. No sell signal as Stochastic still bullish, RSI still strong. No sell signal.  Stochastic has turned and so has the 5 and 10 SMA but RSI is still bullish.  Also notice that when RSI bottoms at 50, the black line on price is showing support structure.  We can also see the Stochastic is heading toward oversold and that combined with our support equals no trade and no long trade exit. If you missed the original long or like to add to positions, you can get on-board here.  I won’t describe it…..what do you see?   That initial long trade is up 796 pips as of this chart!   In Summary   This is a great swing trading strategy that harnesses the power of common technical indicators: Moving averages Relative strength index Stochastic oscillator   We also included common price structure (support and resistance) and we need price action to get us into the trade via stop orders.   As will all swing trading strategies on this site, test them, tweak them and prove to yourself they can work.

Exit profitable trades is the objective of all trading right?  Let’s take a look to see various ways we can accomplish just that.   At the end of October we took a look at the monthly EURUSD chart and saw a break of a wedge formation.  You can see what we wrote back then in this post.  We suggested that you wait for a pullback to the lower trend line to enter the trade.  We got one on October 26th.  For the entry we waited to see a red bar close and placed our entry below the low of that bar.  This happened on the following day.  Here’s an example of how you can exit profitable trades.   Entry after pullback to bottom of wedge formation   Exactly where you placed the entry will depend on how much confirmation you want.  The simplest entry would have been at the close of the red confirmation bar (1.1013).  A more conservative approach would have you placing your stop entry order below the 1.100 level, which also happens to be right below the low of the bar (1.0999).  I took the more conservative approach.   The first thing you need to do when placing a trade is to put a protective stop and a target order in place.  This is essential to exit profitable trades eventually.   At the close of the red setup bar there was no convenient swing nearby and since the setup was somewhat small I opted for the high of the last three bars as my initial stop.  This was the bar from October 23rd (high at 1.1139).  I placed the target at the low of the monthly formation, 1.0470.   With my entry, protective stop and target orders in place it was time to plan my trade management approach.  Assuming the setup triggers how will I manage the stop?   Trend Line   The simplest approach is often the best.  I drew a trend line from the October 15th and October 22nd highs and extended it.  I would keep my initial stop in place and trail the trend line once it moved below the initial stop.  After that I would exit the trade on any close that broke the line.  On December 1st price closed above the trend line and I moved my stop right above that bar (high of 1.0636).  Two days later my stop was hit.   An alternate approach would have had me exiting on a touch of the prior day’s trend line which would have had me exit profitable trades at 1.0606 for a slightly better profit.  There’s a risk here that you might get stopped out on random noise which is why I like trail my stop several pips above the trend line and then wait for the trend line break.     Exit the trade after a close above the trend line   You can review this article on trend line breaks for more examples.   Swing Levels   In a trending market another simple stop management method is to use swing levels formed by price retracements.  Whenever a new swing level is formed we move the stop down.   Since the definition of a down trend is a series of lower swing highs and lower swing lows this approach could keep us in a trade for the long haul.  It tends to give the trade more room to retrace than the trend line approach but because of that the stops will also be hit later and yield smaller profits.   You can see in the chart below how I would have made only three adjustments to my stop after the initial setup.  For this trade the stop would have been about 130 pips higher but still yielded a very nice profit.   Stop trails each new retracement swing high   We also cover this approach to stop management in our 50 EMA Swing Trading System.   Parabolic SAR   The parabolic SAR indicator places its initial stop above the recent swing level and then gradually tightens the stop as price advances.  It gives the initial trade plenty of room to room to chop around but once it starts moving the stop gets ever tighter.  It works very well with breakouts and you can read more about it in our Parabolic SAR Indicator Trading Strategy.  You can see how well this stop would have worked in this picture:   Parabolic SAR stop tightens as the trade progresses   To use the parabolic SAR you would have kept your initial stop in place until the parabolic stop moves below it, and from then on you’d simply adjust your stop daily based on the value of the indicator.  The final stop placement in this case was at 1.0636, a few pips below the trend line exit we described above.   Mix and Match   I like the parabolic SAR stop very much but don’t like the fact that it can take quite a while before you eliminate the risk on your trade.  In the EURUSD we entered the trade October 28th and it wasn’t until November 11th that the parabolic stop dipped below our entry level.  That’s why I would have kept my initial stop in place until then.   I like to combine the SAR with a secondary strategy that has me locking in profit earlier, such as the swing level stop.  The swing levels had me tightening my stop three times before the parabolic stop finally caught up on November 19th.  Once it did it ended up giving me a much better exit than I would have had with the swing level alone, about 130 pips better.  You can see what this looks like below.   Swing level stop is combined with Parabolic SAR to lock in gains earlier   Conclusion   There are many more approaches to managing your stop once you’re in a trade.  It’s key in particular to exit profitable trades since this is the outcome we’re all after.  You can switch to a lower time frame chart, like a four hour or one hour, and then apply a trailing 50 EMA stop for example, or you can look for lower time frame support and resistance levels to plan your exits.   And of course you can combine some of our other systems.  The key is to minimize your initial risk and start locking in profits without risking stopping out due to simple market noise.  And as always, keep it simple.


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